Definition of Market Value in Real Estate
A Lesson on Determining Market Value
Written By: Mariko Baerg, REALTOR of Bridgewell Real Estate Group
If you’re looking for a realtor to help you determine market value for a home that you’re considering buying or selling, call me today!
With so many different ways for home sellers to list a property, understanding how to determine market value in real estate is one of the key components to ensuring you don’t under sell or over pay.
This blog will go through the definition of market value in real estate, as well as the key components that determine market value in addition to just the basic supply and demand.
We also go over the different between listing price and market value, and examples and lessons to help you in obtaining a deeper understanding of market value in real estate.
For everything you need to know about market value in real estate, keep reading!
Definition of Market Value in Real Estate
The definition of market value in real estate is essentially the amount that a current buyer is willing to pay and what a current seller is willing to sell their property for, based on how the subject property compares to other properties that have recently sold in a similar conditions as well as overall real estate market conditions. (ie supply and demand)
When estimating market value, a realtor will always pull recent comparables sales that are similar to the subject property to provide the buyer and/or seller with an analysis of the current market sales, and then factor in the conditions of supply and demand. This analysis takes in to consideration MULTIPLE properties, and should not simply include only one comparable. This is because to estimate market value we need to obtain an idea of what the general buying population in the current market condition is willing to pay, and thus find a similar trend of prices and/or price ranges that would be an accurate representation of market value for the subject property.
In this definition, there are some assumptions that need to be made that the agreeable price is in fact true market value – and a representation of what the current market and “typical” buyer and seller would agree to. It would have to be the case that the parties are not affected by undue stimulus, and that they are acting under conditions whereby:
- both the seller and buyer are well informed with comparables and market data by a professional realtor
- both the seller and the buyer are well advised, and each acting in what he or she considers his/her own best interest;
- a reasonable time is allowed for exposure in the open market;
- the buyer and/or seller is motivated to a “typical” standard, and not influenced erratically or out of desperation
- the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
A buyer or seller that is contradictory to one of the above, may mean that sale is not representative of TRUE market value.
An example of this is if a home is sold by the owner themselves (for sale by owner), in which case they would likely not be well advised or well informed.
Another example of this is if a seller is not presented with all of the comparables and not educated on what other properties are selling for, and a buyer submits a low ball offer and the seller is influenced to accept it (ie not well informed or well advised), then that lower sale may be deemed a “one off” and is not necessarily a representation of true market value.
How to Determine Market Value
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Supply and Demand
What seems like forever ago I went to University and got a Bachelor of Economics [yes I like econ, and yes I know I’m pretty much the only one]. While much of what I learned does not help me in many scenarios, one place where my education is relevant is the real estate market.
Remember basic supply and demand? A market is where buyers and sellers meet to exchange something [in this case, a house], and the relationship between supply and demand affect prices. More specifically:
- Increased demand increases prices
- Decreased demand decreases prices
- Increased supply decreases prices
- Decreased supply increases prices
To sum up the current market: Increased demand and decreased supply together results in ridiculously high real estate prices.
Ironically enough, if people perceive the real estate market as going up (ie value is increasing) the population typically feeds this (creating demand), which in turn influences price. Therefore if value and demand are both increasing, then this will increase the price.
If the market value is perceived by the general population as decreasing, typically supply increases (more seller wants to offload and sell their property before values further decrease), demand often decreases because buyers are nervous to buy in a “down’ market and prices go down.
Pro investor tip: As a real estate investor, it is best to buy low and sell high; which is actually contrary to what the general population does when markets value is increasing or decreasing. However, timing the market is incredibly difficult and we all wish we had a crystal ball!
Comparable Sales
Factoring in recent comparable sales is one of the best ways to determine what a property will sell for in the current market. To determine the best comparables, you’re typically looking for properties with similar hard stats (number of bedrooms, bathrooms, square footage), style of home, same area (ideally the same subarea), and a similar age.
In this approach to determining market value, you will assess the RECENT sales of properties of a similar stature and what they have sold for and review any adjustments that should be made for differences in comparables. (ie renovations, market conditions at the time of sale, etc.)
Considerations for “adjustments” (essentially comparative pros and cons) that are often taken in to considering when calculating the market value of a home are:
- Interior layout & design preferences at the time (ie right now, open concept is popular)
- Location & proximity to various types of transit (skytrain > westcoast express > 1 bus > 2+ bus)
- Age
- The interior size of a home
- Garage, carports, decks, number of parking stall, RV parking, etc.
- Upgrades and maintenance such as: renovations, hot water tank/furnace/roof/windows updated, flooring, appliances, and more
- Lot size if detached, and whether the lot is flat, sloped, difficult to build on, in a flood plain, or has large trees with roots located on the lot area
- If strata, contingency reserve funds, special levies, maintenance fees, and overall pro-activeness of the strata
Market value is always changing, and whether something is deemed a RECENT comparable sale is dependent on how fast the market is moving. In a market where homes are selling quickly and prices are rising, market value can change daily. Alternatively, if the market is slow and there aren’t a lot of sales then there may not be very many “similar” properties; which would result in an agent having to search outside of their typical comparables and make a more expansive analysis of the pros and cons of each property to come up with an estimate of market value.
Market conditions
As mentioned, market value is always changing; so it is important to assess the market conditions at the time of any given offer and/or sale to determine if in fact market conditions have changed. Are you in a cooling market? Are you in a rising market?
For example, if you are in a rising market with high demand and low supply, it is very likely that market value will rise from the previous property sale to the current property offered on for sale. In a rising market, if a buyer and seller come to an agreement on price this then becomes the new market value, and this process continues upwards and upwards.
If you want to get an accepted offer and are wondering what to offer, you’ll need to consider what market conditions you are in to determine what you should offer as a buyer or accept as a seller. If you’re in a rising market and don’t offer X price now, if you lose out on this property will it continue to rise by the next time you write? Is it better to bite the bullet now to avoid paying more later due to the market value rising? These are things you need to consider to make an educated decision for yourself.
To really solidify what market value is… an appraiser is typically hired by the lender to appraise the property. I cannot tell you how many times the appraiser says that it’s worth exactly what the buyer has offered (about 95% of the time), and that is because ultimately market value becomes exactly what a buyer and seller agree to sell a given home for.
Buyer’s place different values on different things
This is where it gets complicated. Value is not always about the basics, and some buyers might pay more for a property based on certain items they perceive as valuable. However, value is truly in the eye of the beholder.
For example, a seller could feel that their new roof that they put on has great value, but the buyer expects the roof to be in good condition and doesn’t value that roof as an extra $10,000.
Another example is different buyers in a multiple offer scenario; one buyer may be willing to pay more for the property because it is the only one on the market with 11’ ceilings and large windows that make the area bright, while the other buyer doesn’t consider those as huge value-added
When you see a price and think “I would never pay that,” just remember that market value isn’t based around what YOU will pay or what YOU value a property to be per se. However, market value is taking in to consideration the buying population as a whole by pulling multiple comparable properties, recognizing a similar trend and similar price range for those properties, and factoring in overall real estate market conditions.
You Don’t Determine Market Value
To really drive home that YOU as an individual buyer doesn’t determine market value, let’s go through some examples of how the market dictates how much the house is worth. To be fair, I (as a realtor) don’t determine market value either. Guess who else doesn’t determine market value….NOT the seller. NOT the buyer. NOT the real estate agent. AND CERTAINLY NOT E-Value BC/BC Assessment. True Market value is the point at which a seller and buyer mutually agree to exchange a house for a certain amount of money.
The simple truth is that houses that are overpriced do not sell, because the market is not willing to pay that price today. Houses that are underpriced get multiple offers, because the market is more than willing to pay that price and more today.
Scenario #1: Multiple Offers
Here’s a scenario that we see often in today’s condo market when a home receives multiple offers:
- Condo is priced at $649,000 and the sellers set an offer date the following Monday at 6pm in hopes of obtaining multiple offers.
- Evalue BC says it’s appraised at $605,000.
- The seller receives 7 offers.
- One or two of those offers is usually around listing price.
- Three or four offers are in the middle of the pack and offer over the asking price, but within moderation – say around $675,000
- One or two offers REALLY want the place and have lost out on a couple of offers before. They offer a ton of money and are willing to pay $700,000.
- After all negotiations the condo sells for $710,000 subject free.
So what is the market doing here? Low supply and high demand. While most buyers felt that the market value of the property was $675,000, the laws of the market drove that price higher and the Seller was lucky to find a Buyer who was willing to pay more. So is the market value $675,000 or $710,000?
Answer: The market value is $710,000.
A couple of days later the appraiser from the bank comes through to appraise the property. They know that E-value BC says $605,000, and they know that someone was willing to pay $710,000. The appraisal goes through at $710,000 with no problems – WHY? Because the appraiser understands that the market value is the price at which the highest offer/buyer is willing to pay.
What can we learn from this? The market value was not determined by the seller, it was not determined by what the majority of buyers thought it was worth, it was not determined by BC assessment, and it wasn’t determined by the realtor. The property sold for the point at which a seller and buyer mutually agree to exchange a house – which in this case was $710,000.
So, while market value largely relies on the precedent that has already been set, therefore other RECENT sold comparable properties, if someone is willing to justify paying more, then that is the new market value. The unfortunate news for other buyers is that in a rising market if you aren’t willing to pay the most today, you’ll likely have to learn the hard way and pay more down the road.
Scenario #2: The Overpriced Home & Why Listing Price Doesn’t Mean Anything
Here’s another common scenario:
- A house is listed for $1,799,000
- A few days later, the Seller receives an offer for $1,730,000 and turns it down.
- Two weeks later they receive another offer – this time at $1,725,000.
- A month later another offer is received at $1,735,000.
If 3 Buyers are making offers around the same number, like it or not, that’s likely how much that house is worth. Sellers who are motivated to sell will listen to what the Buyers are saying and eventually accept a lower price, while some Sellers will decide to take their house off the market and wait for prices to increase.
Here’s what the market did: there was low demand for the house at $1,799,000 so Buyers refused to meet the Seller at their asking price. Only when the price is lowered to what the Buyers are prepared to pay, will this house sell.
Listing price is just a strategy that is determined by the seller. Remember, the seller DOES NOT determine market alone; however, they DO determine what the listing price will be. For that reason, listing price and market value are two very different things.
Sellers can list above market value, at market value, or below market value; and whatever listing price they set is simply a strategy based on their personal real estate goals, desired days on market, and how they perceive their home to be valued. Listing price vs market value and home pricing strategies is an entire other blog (there’s so much to know!), but if you want to learn more about it then check out this blog: Listing Price vs Selling Price Market Value
BC Assessment doesn’t always correlate to market value
It is common for a number of buyers and seller to refer to Evalue BC assessments to determine a home’s value; however, assessed value does not typically line up with true market value for a number of reasons.
We have discussed the importance of recent comparable sales helping to determine market value, and one of the most important things to understand about BC assessment is that these values are assessed and estimated on July 1st of the PREVIOUS year…. Meaning the assessed value is over 6 months outdated by the time you get your assessment slips in January.
Here’s a metaphor for you: If I told you on July 1st that the weather on January 20th of the following year would be sunny and 20 degrees, how much weight would you put on that? Probably not a lot.
Ultimately, the key differences between assessed value vs market value are:
- A buyer has a physical presence to view the home as it is and get the full picture, whereas an assessment appraiser rarely visits a home to assess it in person. For this reason, an assessed value is not a full and accurate measure of the home’s state in terms of layout, maintenance, renovations, and more.
- More factors are taken in to consideration when determining market value, therefore allowing for a more accurate representation of the value of a home
- A lot can change in 6 months, and BC assessment is only assessed once a year on July 1st of the previous year; whereas, market value is in real time with recent and comparable sales as well as current market conditions taken in to consideration.
Timing and the current state of the real estate market is a huge factor when it comes to determining market value of a home, and due to the nature of when and how far out property assessments are calculated, this is one of the reasons it is not representative of the current market value of your home.
Ultimately, you shouldn’t put too much weight on assessed value when it comes to the real estate market.
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Determining market value in real estate is one of the most difficult and complex things to understand as a buyer or a seller, but as experts it is our job to guide you through the process and make sure you are well-advised and well-informed when buying or selling.
Whether you’re looking for a FREE market evaluation on your home, or for a realtor to help you buy, we are here to provide you with comprehensive market information and valuations so you can achieve your real estate goals. Give us a call at 604-765-0376. Prefer text? 604-319-0200. or email [email protected] to start a conversation.
